The B2B Ladder Approach

Investors who have until this point shunned the business-to-business (B2B) sector for consumer oriented issues, have recently taken notice of the emerging wave.

It’s hard to ignore a sector that will do 10x the amount of
revenues that the B2C market will do in 2003 (B2B=$1.3 trillion vs. B2C=$108 billion). Whether we’re talking books or bolts though, Internet stocks remain highly volatile and risky investments.

Recognizing the potential market opportunity, I’ve come up with an approach
to help investors enter the sector on his/her own terms. I call it the “B2B
Ladder” and the idea is
that the higher a company stands on the ladder, the less risk for investors.
The approach was created with three top-tier B2B companies in mind, all
having a relationship with one another. I’ve started from the top down from the least amount of risk to the stock with the most risk, with regard to the ladder.

Safeguard Scientifics (SFE)
Ladder Value: Owns 14 percent of Internet Capital Group (ICGE)
Wednesday’s close: 113
52 week range: 24-127 >
Market Cap: $3.953 billion
Revenues for nine months ended 9/30/99: $2.33 billion
Shares Outstanding/Float: 34.8M/27.5M
Investor Insider: Safeguard Scientifics has been an investor in Internet Capital Group since 1995 and the founders of ICG came from Safeguard. It appears that the apple doesn’t fall far from the tree.

Breakdown:

Founded in 1953 (the company constantly changes its business strategies),
Safeguard Scientifics is an Internet holding company that acquires, operates
and manages business-to-business companies. SFE focuses on companies engaged
in e-commerce, e-communication, and e-business services.
Safeguard currently has 12 public partner companies including Internet
Capital Group, U.S. Interactive (USIT) and Pac-West Telecomm
(PACW)
. If you consider the market caps of these three stocks, along with
Safeguard’s ownership stakes, you begin to see the assumed underlying values
of SFE investments.

The combined market caps of USIT, PACW, and ICGE as of
Wednesday’s close were $21.8 billion. The ownership stakes for Safeguard:
USIT-11%, PACW-7%, and ICGE-14%. So the market value of Safeguard’s
investments in these three companies alone, is worth $2.94 billion at
current public market prices. The average investment stake for Safeguard in
its public partner companies is closer to 25 percent.

The average stake in its 21 private partner companies is 37 percent. Two of
these companies set to hit the public market soon are eMerge Interactive, an
online marketplace for the cattle industry, and Opus360, a hub that links IT
professionals with employers.

Investors in Safeguard are treated to the company’s “directed share
subscription program,” which allows Safeguard shareholders to purchase one share of partner companies going public, at IPO price, for every 10 shares of Safeguard stock.

Internet Capital Group (ICGE)
Ladder Value: Owns 36 percent of VerticalNet (VERT)
Wednesday’s close: 159-9/16
52 week range: 14 – 195-9/16
Market Cap: $20.2 billion
Revenues for nine months ended 9/30/99: $14.8 million
Shares Outstanding/Float: 126.6M/14.9M

Investor Insider: ICG pursues a strategy similar to CMGI (CMGI), but invests exclusively in the B2B space. ICG partner companies are therefore targeting larger market opportunities, important because the value o

f Internet holding companies to investors lies within the company’s basket of public and private market investments.

Breakdown:

Internet Capital Group is a holding company with ownership positions in roughly 40 partner companies, all focused on business-to-business
e-commerce. The B2B “incubator” has interests in two types of companies: market makers and infrastructure service providers. Market makers are sometimes referred
to as “infomediaries,” as they bring together the buyers and sellers of goods, services and information. VerticalNet is ICG’s highest profile infomediary and investment to date.

Infrastructure service providers sell the software, hardware, and services
that enable B2B e-commerce. Still private, United Messaging, is an “ISP”
within Internet Capital’s network; the company designs, builds and operates
complex messaging networks for large private, public, military, and
government organizations.

ICG strives to identify and invest in B2B market leaders, integrate the companies into its collaborative network, assist them with business development expertise, and share best practices throughout its network of partner companies. So what value add does ICG bring to the table for its partner companies? A source of funding, board level guidance, recruiting contacts, industry partnership contacts, vendor contacts, financial controls and capital market expertise, to name a few.

Breakaway Solutions (BWAY) and US Interactive (USIT) are also public market, Internet Capital Group partner companies.

VerticalNet (VERT)

Ladder Value: the ability to pursue partnerships and networking
opportunities
with other ICG companies, and then leverage those relationships within the Internet industry.

Wednesday’s close: 91-15/16
52 week range: 17-3/8 – 111-15/16
Market Cap: $3.237 billion
Revenues for nine months ended 9/30/99: $10.7 million
Shares Outstanding/Float: 35.2M/14.8M

Investor Insider: “Bio-research Online,” just one of the company’s 51
vertical industry communities, did more in revenues last year than publicly-traded rival, Chemdex (CMDX). Chemdex currently sports a $2.2 billion market cap. Investors might want to consider VerticalNet as an operational, B2B holding company also, rather than simply a vertical B2B marketplace.

Breakdown:

VerticalNet creates communities, “hubs”, for over 50 vertical
business-to-business industries, which include fiber optics, solid waste and
aerospace. Investors can think of each hub as its own portal.
Each portal offers industry specific news, product information, job
listings,
a discussion forum and applications such as storefronts, enabling buyers and
sellers to do business. For example, out of VerticalNet’s 51 industries, I
recently clicked on the “Power Online” hub, where I was met by headlines such
as Duke Energy, Brownsville will jointly own Hidalgo plant. There were 75
storefronts just a click away, alphabetized according to a company’s name. I
wish consumer portals were this easy to navigate!
In its recent Q3 earnings call, VerticalNet announced storefront revenues
accounted for 39 percent of total revenues, sponsorship revenues represented
52 percent of revenues and total e-commerce revenues, which include
slotting fees, commissions from sales and auctions of products, training,
services, and software, climbed to 9 percent of revenues from 5 percent in
the second quarter of 1999.

VerticalNet charges $6,000 per year to host each storefront. So the 75
storefronts I clicked away at within the “Power Online” community will
generate $450,000 alone in revenues this year. Not bad considering
VerticalNet currently owns 50 other hubs, some of which have a sig

nificantly
larger amount of stores; “Food Online” hosts 116 storefronts, adding
$696,000
to VerticalNet’s top line.

The great thing about all three of these stocks is their reliance on a
basket
of private-market, partner companies. Baskets of private companies allow
investors in SFE, ICGE, and VERT to diversify risk, while investing in
potential public companies, at private market valuations. Similar to a
mutual
fund or a Venture Capital Firm, these companies can afford some duds, as long as some of their partner companies become big winners. Hopefully the B2B
Ladder will help all Internet investors enter this lucrative sector on
his/her own terms. Start climbing!

Check back with me soon as I plan to begin interviewing CEOs from all
Internet sectors. B2B executives are first on line.


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